PacWest Bancorp, Western Alliance stocks post steep losses in wake of First Republic deal

By Steve Gelsi

Regional bank stocks are moving deeper into the red on Tuesday, a day after JPMorgan Chase & Co. announced it would acquire First Republic Bank in what was supposed to be a move to shore up confidence in the U.S. banking system.

While JPMorgan Chase & Co. (JPM) CEO Jamie Dimon said the regional banking crisis is now over with its historic acquisition of First Republic Bank, regional bank stocks resumed the steep losses seen in the sector since early March.

"This part of the crisis is over," Dimon said Monday. "For now, let's take a deep breath."

PacWest Bancorp (PACW) was down 27% on Tuesday afternoon, Western Alliance Bancorp (WAL) fell 17% and Metropolitan Bank Holding Corp. (MCB) was down by 19.3%.

CFRA Research analyst Alexander Yokum said one key takeaway from the acquisition of First Republic Bank by JPMorgan is that recent regional bank failures will have a negative impact on future earnings for the banking industry.

"All the costs of bank failures will be borne by banks and not taxpayers, although we expect banks to indirectly pass along many of these costs to customers through higher fees and higher interest rates on loans," Yokum said.

CFRA estimated that replenishing the government's Deposit Insurance Fund could impact banking industry earnings by 14% over one year, and 7% impact over two years, or nearly 5% over three years.

The KBW Nasdaq Bank Index was off by 5%, the Financial Select Sector SPDR Fund (XLF) was lower by 2.6% and the SPDR S&P Regional Banking ETF (KRE) fell by 6.7%.

JPMorgan shares fell 1.7% and Goldman Sachs Group Inc. (GS) dropped 2.4%, while the Dow Jones Industrial Average moved lower by 1.3% and the S&P 500 moved down by 1.3% ahead of an expected interest rate hike by the U.S. Federal Reserve on Wednesday.

The prospect of higher interest rates may help banks earn more on loans, but it also makes their long-dated security portfolios less valuable, which was a problem faced by Silicon Valley Bank.

While analysts praised JPMorgan's acquisition as a boost to its wealth management platform, Wall Street investors appeared to be uncertain about the impact of the loss of First Republic, Silicon Valley Bank, Signature Bank and Silvergate Bank since early March.

Also read: Regional Bank ETF sinks after First Republic failure, heads for biggest drop since March banking turmoil

Other regional bank stocks also fell. Citizens Financial Group Inc. (CFG) was down 6.2%, while KeyCorp (KEY) lost 9.6% and Customer Bancorp Inc. (CUBI) shed 13.4%.

Joe Lynyak, a partner at Dorsey & Whitney who works in the banking sector, said the stocks may be moving more on negative sentiment rather than any new data points since all the banks have already said they've seen little or none of the flight of deposits that impacted First Republic and Silicon Valley Bank.

"The one aspect of the issue with FRC and SVB and Signature is the impact that the internet has had in propagating oftentimes inaccurate or misleading statements and causing declines in stock values, which is a new wrinkle into bank stability that the government has to deal with," Lynyak said, noting that some investors have taken short positions that could "jeopardize banks' long-term stability.

"The internet can act like a rumor mill on steroids and create potential additional contagion."

-Steve Gelsi

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05-02-23 1514ET

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